Working Paper: NBER ID: w13761
Authors: Carmen M. Reinhart; Kenneth S. Rogoff
Abstract: Is the 2007-2008 U.S. sub-prime mortgage financial crisis truly a new and different phenomena? Our examination of the longer historical record finds stunning qualitative and quantitative parallels to 18 earlier post-war banking crises in industrialized countries. Specifically, the run-up in U.S. equity and housing prices (which, for countries experiencing large capital inflows, stands out as the best leading indicator in the financial crisis literature) closely tracks the average of the earlier crises. Another important parallel is the inverted v-shape curve for output growth the U.S. experienced as its economy slowed in the eve of the crisis. Among other indicators, the run-up in U.S. public debt and is actually somewhat below the average of other episodes, and its pre-crisis inflation level is also lower. On the other hand, the United States current account deficit trajectory is worse than average. A critical question is whether the U.S. crisis will prove similar to the most severe industrialized-country crises, in which case growth may fall significantly below trend for an extended period. Or will it prove like one of the milder episodes, where the recovery is relatively fast? Much will depend on how large the shock to the financial system proves to be and, to a lesser extent, on the efficacy of the subsequent policy response.
Keywords: subprime mortgage; financial crisis; historical comparison
JEL Codes: E44; F30; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| run-up in US equity and housing prices (R31) | financial crises (G01) |
| inverted V-shape of output growth (O41) | financial crises (G01) |
| trajectory of public debt (H63) | impact of the crisis (F65) |
| severity of US current account deficit (F32) | impact of the crisis (F65) |
| shock to the financial system (F65) | recovery from crisis (H12) |
| average drop in real per capita output growth during severe crises (F44) | recovery time (C41) |